Key Takeaways
- To calculate the loan-to-value ratio on your home, divide the total loan amount by the property’s appraised value and express the result as a percentage.
- Lenders use LTV ratio to assess lending risk for mortgage and home equity loans. LTV ratios over 80% are considered high-risk.
- If you have a high LTV ratio on your property, conventional loans and mortgages may not be the best option for you. Instead, consider alternatives such as home equity agreements (HEAs).
When you’re applying for a home equity loan or line of credit, lenders look at more than just your income and credit score. They also want to know how much of your home’s value you’re borrowing against. This number is called your loan-to-value (LTV) ratio, and it shows how much of your home’s value you’re currently borrowing against.
LTV also impacts your creditworthiness, the interest rate you might be charged on a loan, loan terms, and the type of financing you qualify for. Let’s look at how your LTV ratio works, how to calculate it, and how to explore different home equity options.
What is a loan-to-value ratio?
Your loan-to-value (LTV) ratio compares the amount of money you’re borrowing to your home’s current appraised value. Lenders use this number to see how much equity you have and how much risk they’re taking by lending to you. To calculate your LTV ratio, divide the loan amount by the appraised value and multiply that number by 100.
How to calculate your loan-to-value ratio?
To calculate your LTV ratio, you need to know two numbers: your home’s appraised value and the amount you’re borrowing. In the example below, you can see how to use those numbers to determine LTV.
What is a good LTV ratio?
Most lenders consider a good LTV ratio anything that is at or below 80%. Revisiting the previous example, a 60% LTV ratio is good since it falls well below that threshold. Staying under 80% makes it easier to qualify for different types of financing and receive lower interest rates.
Once your LTV rises above that mark, lenders may see you as a higher risk, which could mean you have to accept a higher interest rate or purchase private mortgage insurance (PMI). PMI increases the cost of your loan, though the exact cost varies depending on your lender. For instance, PMI with a rate of 1% on a $240,000 loan would cost $2,400 per year, or $200 per month.
In short, the lower your LTV ratio, the better. Some lenders will allow for LTV ratios between 85% and 90%, but these agreements usually come with higher costs and stricter lending requirements.
What is a combined loan-to-value ratio?
If you already have a home equity loan or HELOC, lenders will consider your combined loan-to-value (CLTV) ratio, which includes both your existing mortgage and the new loan amount. For example, if your appraised home value is $400,000 with a $240,000 mortgage, your LTV ratio is 60%. If you add on a $40,000 HELOC, your CLTV is now 70%, which is still below the 80% threshold.
But what if you have a $400,000 appraised home value with a $340,000 mortgage balance? In that case, your LTV is already at 85% before any additional debt. At that level, it’s going to be more difficult to borrow against your home equity.
How LTV affects your equity options
Your LTV ratio doesn’t just affect your interest rate — it also determines which home equity financing options are available to you. If your loan-to-value ratio is above 80%, here are some alternative mortgage and home equity options to consider.
FHA Loans
Backed by the Federal Housing Administration, FHA loans allow down payments as low as 3.5% and accept initial LTV ratios up to 96.5%. They’re often an option for buyers with smaller savings or lower credit scores. However, you’ll need to pay a mortgage insurance premium (MIP), and unlike PMI, you can’t get rid of it unless you refinance.
Freddie Mac and Fannie Mae Loans
Freddie Mac’s Home Possible and Fannie Mae’s HomeReady programs cater to low and moderate-income borrowers, with LTV ratios as high as 97% allowed. However, mortgage insurance is required until you reach 80% equity.
VA and USDA Loans
VA loans for military service members and USDA loans for rural borrowers allow LTV ratios up to 100%, with no private mortgage insurance requirement. However, these programs come with funding fees or other upfront costs.
Home equity agreements (HEAs)
If you already own a home, have built up home equity, and want to tap into that value, a home equity agreement (HEA) may be a good alternative to a traditional loan—though a minimum LTV is still required. With an HEA from Unlock, you receive cash in exchange for a share of your home’s future value. There are no monthly payments, making this option attractive if you’re mindful of your cash flow, and prefer the flexibility to defer the cost of tapping your equity until the end of the term.
What if your LTV is too high?
If your LTV ratio is too high, you may want to work to lower it before trying to access your home equity. There are two ways you can do this — by increasing the appraised value of your property, or by paying down your mortgage balance.
Home values naturally rise over time, and Zillow predicted that U.S. home prices will likely rise 1.2% over the next 12 months. So even if you do nothing, your home’s appraised value may increase on its own. Making certain home improvements can also increase your home’s value.
You can also reduce your loan balance by paying down your mortgage. Making extra payments toward the principal, refinancing to a lower interest rate, and mortgage recasting can help you pay down your mortgage faster.
Unlock your equity without a monthly interest payment
Your loan-to-value ratio is a key factor in determining which equity products you can access and what terms you’ll receive. A lower ratio often unlocks better rates and more flexibility, while a higher one can make borrowing more challenging.
But your LTV doesn’t have to define your interest rate on a loan. Flexible options, like an HEA from Unlock, give you a way to tap into your home’s value without adding monthly interest payments.
Start by calculating your own LTV so you know where you stand. From there, explore your options and see how Unlock can help you access the equity you’ve built on terms that work for you.
See how much you prequalify for in less than a minute.
Get StartedFAQs
Q. What is a good LTV ratio for a home equity loan?
Most lenders consider an LTV of 80% or less to be ideal for a home equity loan. Staying under this threshold can make it easier to qualify and help you secure more favorable rates.
Q. Can I get a HELOC with a high LTV?
That depends on your lender. Many lenders cap LTV ratios at 80%, though some may be willing to go as high as 85% to 90%. But in general, the higher your LTV, the more limited and costly your options may become.
